December 2017 Market Review and Outlook

Jan 1, 2018

While the year didn’t officially end until December 31st, the markets broke out the party hats early to celebrate at the market close on Friday, December 29th. And deservedly so, as they shattered records left and right during 2017 – despite political gridlock, North Korea’s military overtures, and several highly destructive hurricanes. The markets didn’t seem to mind these events as they had little or no impact on corporate profits – the real driver of the momentum.

Both the Dow and S&P ended December with monthly gains, setting or extending some notable records. The Dow closed higher for the ninth month in a row, the longest streak in nearly 60 years. The Dow closed at new highs 71 times in 2017, a new record, The S&P 500 also posted a ninth monthly gain, last accomplished in 1983. On a total return basis (reinvested dividends), the S&P 500 closed higher for the 14th month in a row – another new record.

All of the major US indices ended the year significantly higher. The S&P gained 19.4%, the Dow added 25.1%, and the Nasdaq rose 28.2%. All three indices posted their best year since 2013, and the Nasdaq rose for its sixth straight year. The Russell 2000 small cap index was the laggard, rising “only” 13.3% – yet a second straight annual gain.

For the year, the Technology sector far outperformed the other sectors, rising 36%. Materials were the next-best sector, up 21%, followed by Consumer Discretionary, which gained 20%. Telecom fared the worst, dropping -6%, followed by Energy’s -4% loss and Real Estate’s 9% rise.

Although the Energy sector remains in the red for the year, West Texas Intermediate ended the year above $60 a barrel, the highest close in more than two and a half years. Concerns of oversupply have abated, and rising demand and the OPEC production limit extension thru 2018 contributed to the commodity’s strength.

The Fed raised interest rates by a quarter of a percent in December, a move that had been clearly telegraphed for months. Despite the three interest rate hikes in 2017, yields on the 10-year remain roughly where they were a year ago. The Fed has made clear that it intends to raise rates in 2018 and reduce its balance sheet. Goldman Sachs predicts 4 hikes in 2018.

As the year wound down, economic indicators continued to show mostly positive monthly results. The Chicago PMI rose from 63.9 in November to 67.6 in December, closing the year at the highest level since March of 2011. (Any reading above 50 indicates improving conditions). However, the Consumer Confidence Index decreased to 122.1, after reaching a 17 year high of 128.6 in November. While this decline shows a less optimistic outlook for business and job prospects in the coming months, the expectations remain at high levels, suggesting further growth in 2018. GDP grew at a 3.3% annualized rate in the 3rd quarter, the fastest in three years. Jobless claims remain at their lowest levels in 45 years, a sign of a very strong labor market. The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.14% in November on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 2.2 percent.

2017 will go in the books as a banner year for the markets. The market has gained 376% since the March 2009 lows, for a whopping 19% annual return. And 2018 may be a great year as well, as the recently enacted tax cuts should help the profitability of US companies. Furthermore, expectations that $1 trillion in infrastructure spending may become a reality also provide a potential economic boost.

Despite the rosy scenario for the new year, market risks remain. This bull market is long in the tooth, and the S&P 500 hasn’t experienced a 2% decline since two months prior to last year’s election and the last correction of 10% was more than 2 years ago. Further turmoil from political and geopolitical sources continues to weigh on the markets.

Investors should be very pleased with the markets’ performance in 2017, but be aware that this was an anomaly. By reassessing market expectations and re-evaluating risk profiles investors can prepare for future performance and volatility. We maintain that proper risk management with a long-term investment horizon is the best way for individuals to fulfill their financial goals in 2018 and beyond.